I had been wondering, you see, how little seems to annoy economists more than when boneheaded thickos like me refuse to unreservedly accept that the minimum wage is a bad policy that costs jobs. Why can’t the public get it into their daft heads and just accept that the policy is flawed because real economists instinctively oppose it?

This assumption, of economists’ antagonism towards the minimum wage, took a bit of a hit when over 650 of them – including some prominent names – signed this declaration that argued in favour of just such a policy in the US, stating that “a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed” and that “the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment”. So much then for the economists’ consensus.

Of course, this was still mocked by opponents of the minimum wage. Café Hayek inducted all those who had signed the declaration into their “Hall of Shame”, stated that the signatories must “believe that demand curves are vertical”, and asked, “how can you sign your name to something like that and call yourself an economist?” That, I guess, is how you maintain a consensus; by cutting adrift and blanking out those who disagree with you.

Now it is a good line of Café Hayek’s, saying that these rogue economists believing in a vertical demand curve, but I think you can get too hung up on such details. I remember being told about the unemployment effects that can be caused by the minimum wage when I studied for my degree, and it certainly makes sense. If memory serves, the diagram explaining it goes something like this.

And before the minimum wage was introduced in the UK I myself cautioned against it, flaunting the meagre economics knowledge I had gained from my shiny new BSc on the subject (many years ago; now my 2:2 looks old, tired and tarnished, and I don’t know where you can buy Duraglit these days).

But surely you don’t need knowledge of economics to see the harm that a minimum wage can do? You can forget curves and their angles; at its heart the idea is simple. An increase in the minimum wage means an increase in costs for any business that employs people on the minimum wage. Businesses have to deal with that. They may absorb it from their profits; they may pass the increased costs onto their customers in the form of higher prices; but some may seek to cut costs as a consequence of the increase in their wage bill, and one way to cut costs is to lay off staff (or reduce their hours). In addition, for some firms an increase in the minimum wage, and so costs, may be the difference between just staying in business and going bust. True, such companies are likely to be in a pretty precarious financial position as it is, and just as likely to go bump with the next strong gust of wind; but still and all, the inevitable consequence of a minimum wage is that some people may lose their jobs.

But why single out the minimum wage for such criticism? If you want to rail against the minimum wage, why not rail against anything that imposes costs on companies? Health and safety laws for example, not just the frivolous kind that make the front page of the Daily Mail, but any such intervention that puts helmets on builders’ heads or prevents lorry drivers from mimicking a single-crewed Le Mans race while on the road? Or interests rates? Perhaps we should never raise interest rates because that too can cause problems for business and increase their costs? We should never raise interest rates, for whatever reasons. Or increase taxes under any circumstances whatsoever. I don’t know what we should do when commodity prices rise, but we had better think of something soon.

Of course we can’t do much about the price of commodities on a global market, so business will just have to deal with that. And taxes, and H&S laws? Well again, they are clearly needed at some level, so we must grin and bear them too. Interest rates? Well, obviously, they may have to rise at times, for the greater good, to control inflation or whatnot, as long as they are raised at a careful and sensible level, as long as we don’t go mad and quadruple them overnight. But can’t the same apply to the minimum wage, if it is introduced or raised at a sensible rate? I see loads of adverts in shops and pubs near where I live advertising for staff at the minimum wage, not a penny more. They don’t seem to be looking at redundancies, quite the opposite, and God knows what they would be offering if they weren’t forced to pay more. Can’t the minimum wage be seen in the same light as health and safety, tax and interests rate rises, as something that may need to be done to protect certain parts of our society even if it can also have some negative effects?

Great if you are the one getting the pay rise, it could be said, not so great if you are the unfortunate one losing your job in society’s reshuffle as it digests the increase in labour costs. And it is true, for every action there can be an equal and opposite reaction, and unintended consequences too. But for me, I would take this criticism of the minimum wage more seriously if those making this point and shedding tears for the losers from a minimum wage didn’t tend to find their tears drying up when discussing the jobs similarly lost through offshoreing and globalisation, through industry consolidation and productivity drives, or any other form of profit chasing that can cause job losses. If you think a policy is justified then you think it is justified, in spite of the negatives consequences (just as long as those negatives don’t outweight the positives).

But need there be job losses because of a rise in the minimum wage? Not if you think that the demand for labour is vertical, ha ha. Unfortunately for Café Hayek, their opponents who signed that statement in favour of a minimum wage rise don’t believe this either. They clearly state that a rise in the wage will have “very little or no effect on unemployment”; so they accept the possibility of job losses. Even then, though, I have to ask; how do you view economic models? Are they precise, are they definite, are demand curves perfect sloping lines you can fix a point upon to show the impact of policy decisions? I’m not an economist so I wouldn’t really know, but I say not.

Take the Laffer curve, the theory that states that a cut in the tax rate can lead to an increase in taxation revenue. It is often denounced as a “back of the envelope” theory that cannot be proven, but really it is an accurate truism. At a 0% tax rate there is clearly no tax revenue, while at a 100% tax rate there is still no revenue because everyone will bugger off to a more benevolent country with a generous 99% tax rate. Between these two zeros there must be some sort of curve of tax revenue that rises then falls as the tax rate increases. If you are the right side of the apex of the curve then in theory you can cut tax and still see an increase in revenue. This is no good for policy making – no one knows how the curve is drawn, or where we are upon it – but as an insight into how things work I think it is useful.

And I think the same holds true for demand curves. Of course they slope down, and that is good to know. More people will want to employ me if I say I will work for £1 an hour than if I want £100 an hour. An employer who may be happy to employ me for £1 may tell me where to go if I demand £5.52. So the minimum wage is bad and causes unemployment, no?

But what of the demand curve for Rolls Royce cars? Is that vertical? No, it too clearly slopes down. Demand for a Rolls Royce at £15bn a car? Nil. For £15? Loads. But; taking the current price of a Rolls Royce (which I confess I just don’t know, I’m really not in the market for one), would demand fall if the price rose by 1p – a “modest increase”, as the signatories of the pro- minimum wage statement ask for? No it wouldn’t. What about £1. Clearly not. £100? Unlikely. £1000? I still doubt buyers of new Rolls Royce’s would even blink at such a price rise. £10,000? Now you’re talking, probably. A £10,000 increase in the price of a Roller would hit demand for the vehicle, so the demand curve for the things does slope downwards, it isn’t vertical; but that doesn’t mean that any price rise will cause a reduction in demand. Actually, I don’t know why I picked such a strange example. What about something simpler, more down to earth like a Mars bar. Will demand for them fall if the price rises by 1 or 2p? Will it balls, but economic theory suggests it will. In short, theory suggests that as price rises, demand falls; in practice, price often can rise with nish effect on demand, especially if such a rise is in line with inflation. I think the demand curve, like the Laffer curve, should be viewed as a general illustration of how economics works rather than as a precise analytical tool, or a blunt ideological instrument of scientific fact.

So we’re agreed are we; that a minimum wage needn’t be opposed in principle, it can be accepted as a necessary tool in the policy makers’ toolbox even if, like other elements of policy it can have some undesirable effects, and it may not even cause these side effects anyway? Good. But in reality, is it the best way to help the poor and the low-paid? Ah, well, that is a different question altogether.

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11 Comments to “Yee-Haa!”

Luxury goods are always special cases, so maybe Rolls Royces don’t provide the perfect analogy. Arguably (and the UK buying public is especially prone to this thinking) Rollers derive some of their value from their excessive price; reducing their cost therefore reduces their attractivity, which would at the very least complicate the Laffer Curve. Ultimately, though, it’s all about which small increment wins out, isn’t it?Still, whatever your conclusion, you have to bear in mind that most large economic institutions still consider GDP to be a good indicator of a thriving economy, even when it’s accompanied by, oh, misery and child abuse. We should all move to Bhutan in protest, I reckon. Welcome to Blair’s Bhutan, ahaha.

Good point. The more I think about it the more I wish I hadn’t used Rolls Royces as an example. I suppose I was just trying to think of a product where you could conceive of a large headline price increase that wouldn’t affect demand. In fact I think you could substitute many, non-luxury items for Rolls Royces (which is why I added Mars bars as an alternative) where a modest price rise relative to value would likely have no real effect on demand. It’s just that £1000 sounds more significant even though it would still be a relatively small percentage price rise for a RollerThat said, Veblen good or no, I think the point I made about Rolls Royces is valid, it’s just that the fact that Rolls are luxury items does detracts from the point I was making. I fell into the trap of being unimaginative and predictable, and not for the first time on this blog.Blair’s Bhutan? Like it.

An interesting post.Will demand for them fall if the price rises by 1 or 2p? Will it balls, but economic theory suggests it will. You can be “highly price-inelastic” over small changes in price (and therefore unresponsive), but that doesn’t violate the fact that demand curves slope downward – because there will always be a potential price change that would illicit a change in behaviour (as I discussed here).Can’t the minimum wage be seen in the same light as health and safety, tax and interests rate rises, as something that may need to be done to protect certain parts of our society even if it can also have some negative effects?But those negative effects harm those very “certain parts of society”. At least with health and safety regulation you’re not directly making unskilled workers more costly to hire. But that’s precisly why economists argue that labour markets should be flexible, regulations minimal, and Central Banks independent.You’re right though – like so many other types of intervention and regulation it’s simply a matter of weighing up positive and negative factors. Which just comes down to who’s got the loudest voice: dispersed unskilled workers, or concentrated unions? Ultimately the minimum wage is very effective at restricting the ability of immigrant workers to directly compete with British labour. To argue in favour of a minimum wage though you’d need to go beyond saying that democracy has the capacity to shift money from some people to others, to explain why it’s morally just to adopt a policy that has deliberately harmed blacks, women, and any other minority group seeking to join the labour market.You seem to accept that the economic rationale is correct (i.e. there will be unemployment effects) but argue that this can be offset by “the greater good”. If that’s the case, it’s an argument about the ethics of intervening to intentionally create unemployment for the sake of higher wages for employed workers. This is completely different to outsourcing, which is not an intervention, but a natural response to market conditions. If outsourcing is legislated against you’re simply consigning people to work in industries that cannot sustain them. When “profit chasing” causes job lossess it is moving resources to more productive uses, and therefore making us wealthier. Intervention simply reallocates those resources to groups with political power, making us poorer. That’s why the job losses due to globalisation are regrettable but inevitable and ultimately beneficial to all parts of society, whilst job losses due to minimum-wages are just regrettable.Finally, you’re dead right to say that whether or not a minimum wage is the best way to help the poor and low-paid is a different matter. But isn’t it a shame that the actual efficacy of a policy should be considered a different matter to the intention? The only reason people (including economists) support a minimum wage is because it has symbolic connotations. No one seriously advocates it as a measure to help poor people. Everyone accepts that the underlying economic implications are correct. It’s just that some people want to play politics and signal their social justnes.But they’re phonies.

Thanks for your comment AJE.First let me clarify the point of this post. It was not to advocate the minimum wage, just to counter some of the arguments against it. I appreciate that affords me the luxury of having it both ways, but there you go. It is one of the benefit of framing the debateAddressing your points, I explicitly accept the downward slope of a demand curve in my post, and state that this is not incompatible with unresponsive demand with regards small price changes. This is to counter Café Hayek’s position (that supporters of the minimum wage must believe that demand curves are vertical) and to show how I feel small increases in the wage may not affect unemployment; a position you seem to accept?Regarding H&S laws, I can conceive of such laws making workers more expensive to hire. Using my – admittedly – simplistic example before; if each workman has to be provided with a safety helmet, that raises his cost by the value of one helmet. It could be argued that some firms would respond by employing fewer people, so they have to buy fewer hats. Critics of H&S laws could argue “I am sure people would rather have a job and risk a brick falling on their heads” etc.We’ve been through this use of the minimum wage as a device that has “deliberately harmed blacks” before and we don’t agree. Some supporters of the minimum wage may have malign intentions; that is irrelevant to whether it is a good policy or not – some opponents of the minimum wage no doubt also support it for weak, selfish reasons – and anecdotally, the minimum wage doesn’t appear to have prevented the employment prospects of the Eastern Europeans who are taking all our jobs (irony), or shifted many of the indigenous economically inactive into the workplace. Perhaps you have evidence to the contrary (government statistics, declining viewing figures for The Jeremy Kyle Show, etc.).I don’t accept there will be unemployment effects; I accept there might be. I also don’t accept the distinction between whether an action is as a result of intervention or not. I don’t advocate preventing outsourcing or globalisation myself, I am happy for the market to work that out and go “profits chasing” (a value laden term I wish I hadn’t used). However I think you hit on a point; it is the instinctive dislike of intervention itself that categorises much opposition to the minimum wage above all else, a belief that it is an affront. In any event, my intention here was to counter the argument I have heard many times before from people who oppose the minimum wage that even if unemployment doesn’t rise overall as a result of a rise in the minimum wage, there will still be some individual people who will lose their jobs, and that this is an argument against. As I say, this argument could be used in many other instances, but where those anti the minimum wage stay silent.As for job losses due to the minimum wage being “just regrettable”, I doubt you would say that is you are a pot-washer who is now on $5.52 an hour, and who incidentally is unlikely to be unionised or hold much political or economic power. That’s the point.Finally you are right that efficacy should be discussed, not just intentions (road to hell etc.) and it is wrong for supporters of the minimum wage to characterise their opponents as heartless uncaring capitalist swine who want to grind the poor into the ground (although no doubt some are). I have no doubt that your concerns are genuine and altruistic. Similarly however I consider it wholly unfair to state that the minimum wage’s supporters are phonies who don’t seriously advocate it as a measure to help poor people. They may be wrong-headed, and your label may apply to some, but if you genuinely believe what you have written in your last paragraph then it is no wonder you fail to see any worth in arguments for the minimum wage, and you never will. It is blinkered mudslinging that closes down debate, the sort of thing I tired of over at your place. The majority of what you have written here is interesting, balanced and informative, the reasons I became an avid reader of The Filter; but I’m afraid the ending is perfect as one example of why I am now just an on occasional dipper-in to your blog.

I explicitly accept the downward slope of a demand curve in my post, and state that this is not incompatible with unresponsive demand with regards small price changes. This is to counter Café Hayek’s position (that supporters of the minimum wage must believe that demand curves are vertical) and to show how I feel small increases in the wage may not affect unemployment; a position you seem to accept? All I’m trying to say is that there will be unemployment effects, but these might manifest themselves as inflation (and therefore a reduction in real wages); a reduction in the number of hours worked; a reduction in new jobs that would otherwise be made available, or countless other outcomes that constitute unemployment effects but aren’t directly observable increases in the unemployment rate. In other words minimum wages do not necessarily lead to an increase in unemployment, but by making it more expensive to hire low skilled workers, they will be made worse off, on some margin. A company might reduce everyone’s overtime by a few hours a week rather than sack someone, but that is still an unemployment effect. They might cancel the Christmas Party. Either way, they’re worse off than they otherwise would be – their real wages will fall. To argue otherwise, and claim that minimum wages have no adverse effects on unskilled labour implies that demand curves don’t slope downwards.the minimum wage doesn’t appear to have prevented the employment prospects of the Eastern Europeans who are taking all our jobsBecause unemployment is a far broader phenomena than a single rate, I don’t see how this can be empirically verified. You’d have to accurately ascertain the job creation plans – and working conditions – before and after a minimum wage, which I think is very difficult. The fact that there’s never been a replicated study that contradicts the claim that minimum wages harms low skilled workers should be taken seriously.I do think the minimum wage is a means to restict Eastern Europeans from directly competing with indigenous workers. I accept your point that there’s malign intentions on all sides, but apologists for minimum wages should – I believe – explain why their policy view is different from the people who got that law adopted in the first place. Personally I think it’s my duty to explain clearly how my own views on trade differs from a mercantilist, even if mecantile policy produced some elements of free trade.I don’t accept there will be unemployment effects; I accept there might be.I think I’m using the term “unemployment effect” in a broader way than you are. I think it’s important to agree that minimum wages create some bad outcomes, and then discuss whether those bad outcomes are offset by the concentrated benefits that offset them. But that’s a matter of ethics, not economics. Economics just says that the economy as a whole is worse off – and unskilled workers are especially targetted. But we need to be clear on that before we make our value judgements.my intention here was to counter the argument I have heard many times before from people who oppose the minimum wage that even if unemployment doesn’t rise overall as a result of a rise, there will still be some individual people who will lose their jobs, and that this is an argument against.The difference is that those individuals are being deliberately harmed by the intervention. I think you’re right if you’re arguing against a utilitarian, but intervention shouldn’t necessarily be justified on utilitarian grounds.I don’t feel I’m being inconsistant in the least to say that unnatural job losses are bad, but natural ones are regrettable but aren’t grounds for redistributive policy. As for job losses due to the minimum wage being “just regrettable”, I doubt you would say that is you are a pot-washer who is now on $5.52 an hour, and who incidentally is unlikely to be unionised or hold much political or economic power. That’s the point.I’ve been a pot washer earning less than the minimum wage. I’m not trying to say that if things are hard to enforce we should ignore them, but for a policy like this the cost of enforcement should be taken into consideration. In my situation, it was easily sidestepped by my employer.When I said “just regrettable” I meant it in the sense that it’s a bad outcome with no mitigating good that comes out of it. When I lost a different job due to outsourcing my temporary situation was offset by the signal that I was working in the wrong industry, and the knowledge that as a consumer of that product I (and the rest of society) was being made better off. (Plus I did take some comfort in the thought that foreign workers who were far poorer than myself were being made immensely better off). If my pot washing employer was forced to pay me more than my marginal productivty or sack me, I’d have been laid off without any good coming from it. “Just” regrettable, as in “wholly” regrettable.I consider it wholly unfair to state that the minimum wage’s supporters are phonies who don’t seriously advocate it as a measure to help poor peopleThat “phony” charge was aimed directly at my fellow professional economists who you mentioned earlier, so apologies if it read as if I was insulting all minimum wage supporters/people who disagree with me. I think the public are misguided to think that it’s an effective policy, and should concentrate on policies that have a larger impact on the poor (education vouchers come immediately to mind). But I stand by the “phony” charge because the point I was making is that sometimes there’s a trade off between being intellectually honest and being popular. Talk is cheap, afterall. For an economist to reject the principle upon which the entire discipline is grounded, is dishonest. If they made that claim for anything other than minimum wage (due to it’s symbolic factors) they’d be laughed out of the profession.Regarding the quality of The Filter^, I hadn’t realised my own quality had deterioted (although I know the quantity certainly has). Ideally my fellow editors would write more often so that it’s less of a one man show. That said, I’m surprised you think I’ve become blinkered and a mudslinger – I shudder when I remember some of the earlier stuff I’ve written!! Regardless, point noted. Finally, I think I might be able to end with a statement that we might be able to settle on:In practice minimum wages can be manifested by broad and modest reductions in real wages, rather than an increase in the rate of unemployment. Therefore economists – who don’t share a consensus view on whether minimum wages should be adopted – often exaggerate the harm caused when they focus on theory.

I see what you mean by unemployment effects other than unemployment itself. Taking my example earlier of a £1000 price rise in Rolls Royces not affecting demand (while a £10,000 price rise would, so confirming the downward slope of the demand curve), I guess you are saying that although a £1000 price rise may not effect sales of Rolls Royces, it will mean that the extra £1000 spent on a car can’t be spent elsewhere, so the effect of a price rise in Rollers could be that the buyer has no holiday that year. Then again, for the economy that £1000 will be spent elsewhere – perhaps on an extra holiday for the manager of Rolls Royce – as it will feed into Rolls Royce’s profits.The more I think about it the more ambivalent I become, if that is possible. By saying that a rise in the minimum wage will have an effect like a cancelled Christmas party, or less overtime, then I think we get back to the simpler idea that a rise in the minimum wage just increases costs and – ceteris paribus – that of course has some effect somewhere. In reality a rise in the minimum wage is just one of many variables that firms have to deal with, along with interest rates, regulations, fuel prices, all changing and pushing and pulling with each other. It seems harsh to single out the minimum wage as a particular cause of hardship when in fact its individual effect can be swamped by so many other factors. I still can’t help feeling that much opposition to the minimum wage is instinctive above all else.As for the minimum wage being used to restrict Eastern European workers, as low paid jobs are just the type that overqualified immigrants typically take then I can see as increase as directly benefiting newcomers rather than harming them. It’s not uncommon to hear factory owners and the like wax lyrical over the industrious Poles who do the jobs lazy Brits can’t be bothered doing, and expressing a preference in employing them over the heads of the indigenous population.But ultimately I don’t think we are going to agree here and are likely to just go round in circles. Don’t let that stop you, though, if you have more to say. By the way, I did read your comment about phonies as a description of minimum wage supporters as a whole rather than those economists specifically. Perhaps you are right on that one, I don’t know. You don’t get many professional economists living around here, and anyway, that’s not my battle to fight, I’m sure they can defend themselves.As for my feelings on The Filter, I wouldn’t say that the quality has dropped, just that I think you used to be a bit more open minded, less ideological. Perhaps I’m wrong, I never read your earliest posts so I can’t compare. Then again bias is in the eye of the beholder. On Sunday I watched the City-Blackburn game with my parents who were convinced that Andy Gray and Martyn Tyler were biased against City; in fact it was my parents’ bias that was the problem, as any pro-City comment was absorbed as being neutral while every pro-Blackburn comment was seen as evidence of the one-sided commentary.Don’t get me wrong, I don’t want The Filter to become some wishy-washy, anodyne blog where you have to be utterly reasonable and impartial, I value your opinion and like to know where you are coming from. I’m probably being unfair, I am certainly being hypocritical, but there you go. Just write what you want to right, I’ll read what I want to read, and things will work out beautifully I’m sure. Like in the free market.

And another thing AJE, if you’re still there. Thanks for your post on The Filter linking here. And thanks for your previous links. And thanks for still reading this bag of nonsense, although God know why anyone does. And if you take your leave of The Obscurer and vow never to return, then fair play. I probably wouldn’t read this rubbish if I hadn’t written it in the first place.(PostScript: the main, main reason for writing this post – and others – has been to get something off my chest, and to test out my thoughts somewhere other than inside my own head. For your input here, and elsewhere, thank you).